Answers to End-of-Chapter Questions and Problems Chapter 1 ANSWERS TO QUESTIONS 1. What is the typical relationship among interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds? The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average. The interest rate on Baa corporate bonds is higher on average than the other interest rates. 2. What effect does high volatility of financial markets have on people's willingness to spend? The high volatility of financial markets decreases people's willingness to spend, primarily because it directly affects their wealth, and also because high volatility indicates that there are considerable fluctuations in the prices of securities over a short time span. It increases insecurities about the future of an economy. Refer to Figure 2 to see the extremely volatile nature of stock prices between 1950 and 2020. 3. Explain the main difference between a bond and a common stock. A bond is a debt instrument, which entitles the owner to receive periodic amounts of money (predetermined by the characteristics of the bond) until its maturity date. A common stock, however, represents a share of ownership in the institution that has issued the stock. In addition to its definition, it is not the same to hold bonds or stock of a given corporation, since regulations state that stockholders are residual claimants (i.e., the corporation has to pay all bondholders before paying stockholders). 4. What is the main role of a financial intermediary? Name two financial intermediaries. A financial intermediary is a firm or institution that channels savings into investments––that is, it borrows funds from individuals who have saved and provides loans to those who need funds. Banks and mutual funds are two examples of such intermediaries. 5. What was the main cause of the global recession in 2020? The recession in 2020, sometimes referred to as the COVID-19 Recession, was mainly caused by the global pandemic caused by the infectious coronavirus disease (Covid-19). In March 2020, the stock market fell by 25% in a single month.